The Financial Times (FT) published a June 9, 2016, editorial titled, “Coping with a world of too much Chinese steel.” (Link) The editorial makes the case correctly that China’s steel overcapacity has spilled onto world markets and is having negative effects on steel makers in the European Union and United States. It appropriately argues against Western governments nationalizing their steel industries or providing “other indefinite state support.”
The editorial errs, however, in suggesting that “the best option is a judicious and limited use of trade remedies against subsidized imports.” Economists have understood for decades that when a nation imposes trade restrictions, it always reduces its own economic welfare. It is difficult to argue that imposing a policy measure that reduces a nation’s economic welfare is a good thing to do. The country would have been better off simply by doing nothing. (“Don’t do something, just stand there!”)
There are two easily understood reasons why imposing trade restrictions won’t help the situation. The first is that the global overcapacity is so great that market prices for commodity grades of steel are low worldwide. If imports of hot-rolled steel from China are limited by newly implemented antidumping or countervailing duty (AD/CVD) measures, relatively low-priced hot-rolled coil could easily be imported instead from countries such as South Korea, Brazil, or Turkey. Curtailing imports from China is likely to provide relatively little relief to domestic steel manufacturers.
The second reason is that restricting imports in an attempt to benefit steel producers will have the effect of increasing costs of production for manufacturers that use steel as an input. These downstream users constitute a much larger segment of the economy. In the United States, for example, data compiled by the Bureau of Economic Analysis (BEA) at the Department of Commerce indicate that economic value added by “primary metal manufacturing,” which includes steel, copper, aluminum, magnesium, etc., amounted to about $60 billion in 2014. Downstream manufacturers that utilize steel as an input generated value added of $990 billion, more than 16 times larger. Employment by primary metal manufacturers was 400,000, while downstream manufacturers employed 6.5 million, also 16 times greater. Use of trade remedies against steel imports amounts to an attempt to benefit the few at the expense of the many.
To elaborate, the United States currently imposes some 150 AD or CVD orders against a large number of steel products from a large number of countries. These restrictions have had the effect of making U.S. steel prices relatively high, while in the rest of the world they are relatively low. Still, important portions of the American steel industry have not been sufficiently profitable. United States Steel Corporation, the country’s largest producer, reported a 2015 loss of $1.5 billion. So U.S. prices are somewhat high, but not high enough to cure the industry’s commercial problems.